IHT Refunds – Check So You Don’t Miss Out

There are a number of planning opportunities to reduce your estate for IHT purposes. But if someone has recently passed away, does that mean it’s too late?

This guide explores a little known loophole that could reduce IHT after death.

A Brief Guide to Inheritance Tax
Inheritance Tax works as follows:

• No tax applies on the first £325,000 of your estate. This is known as the nil rate band.
• The nil rate band can be transferred between spouses. This means that if someone passes their entire estate to their spouse, no IHT applies on first death. The surviving spouse then has a nil rate band of £650,000 to set against their estate.
• The residence nil rate band can also provide further relief from IHT. This can extend the nil rate band by up to £175,000 (or £350,000 for a couple) to offset the value of the family home. This exemption is reduced for estates valued at over £2 million.
• Certain gifts are immediately outside your estate for IHT purposes. This includes charitable donations, gifts from income, and small gifts of up to £3,000 per year, per donor.
• Any gifts which do not qualify for these exemptions remain in your estate calculation for seven years.
• After all deductions and exemptions are taken into account, your remaining estate is taxed at 40%.

When Can You Claim a Refund?
Your IHT liability will depend on the value of your assets at the date of death. This is known as the probate value.

Some assets, such as shares or investment accounts, will be easy to value as the prices are published daily. However, prices can fluctuate rapidly, so the value may vary from one day to the next.

Property and valuables may be trickier to appraise and will depend, to an extent, on someone’s opinion.

Beneficiaries of a will normally want to sell the assets they inherit. This can either be done by the executors or by the beneficiaries themselves once the asset is directly owned by them.

If the asset is sold for a lower value than indicated at probate, it may be possible to claim a refund on the excess tax paid.

For example, if you inherited a house valued at £400,000, the IHT payable would be £160,000, assuming the nil rate band had already been used up. If you sold the property six months later for £300,000, you could potentially claim a refund of up to £40,000.

A few conditions apply:

• Only an ‘appropriate person or persons’ can submit the claim. This will usually be the executors.
• The claim must be made within four years of death for a property, and one year for shares or other investments.
• The estate must have been subject to IHT and the bill paid.
• The sale price must be at least 5% (or £1,000 if lower) below the probate value.
• You can’t withdraw the claim, even if it actually turns out that the IHT bill increases as a result.

When selling an investment portfolio, the claim must relate to the whole portfolio. You can’t simply pick and choose the shares which have made a loss to add to the claim form. You also can’t re-purchase any of the shares within 2 months, or sell any other assets in the portfolio within 12 months.

However, executors can decide which shares to sell and which to pass intact to the beneficiaries. One possibility would be to sell the loss making shares and claim the relief. Profitable shares could then be given directly to the beneficiaries to sell as they wished.

Remember, capital gains are rebased on death, so the beneficiary would only pay capital gains tax if they later sold the shares, and the value had increased since the date they acquired them.

What Do You Need to Do?
HMRC do not issue refunds automatically, nor will they prompt you to make a claim.

You will need to submit a form to HMRC giving details of the estate and the transaction.

The forms are as follows:

• IHT35 for shares and investments
• IHT38 for land or buildings

You may wish to take legal or tax advice before completing the forms.

Some Other Ideas for Reducing IHT
If you plan ahead, there are a number of other options available for mitigating IHT:

• Making regular, affordable gifts throughout your lifetime.
• Settling money into trust to place it outside your estate after seven years.
• Taking out life insurance to pay the IHT bill.
• Giving money to charity. If you leave at least 10% of your estate to charity in your will, your residual estate will be taxed at 36% rather than 40%.
• Preserving your pension, as this can be passed on to your beneficiaries free of IHT (although they will pay income tax if you die after age 75).
• Investing in business assets or smaller companies.

While refunds can be a useful way of reducing an existing IHT liability, they are only available in a specific set of circumstances, and only if the assets inherited have effectively lost money. An efficient estate plan can help to ensure that more of your money goes to your loved ones, while keeping tax to a minimum.

Please do not hesitate to contact a member of the team to find out more about estate planning.